The Consumer Price Index (CPI) report on Wednesday morning was the catalyst that triggered a shift in the character of the market action. The corrective process that started in early September has come to an end and the indices are now working to re-establish an uptrend. Early indications here on Friday morning are that the indices will gap higher at the open for the second day as worries about being underinvested are bubbling up. The start of the earnings season is also helping optimism to build.
Three days ago, the primary concern of market players was to play defense while the corrective process was playing out. The folks in the business media were loudly reporting the bearish narrative of inflation, higher interest rates, political discord, supply chain issues and struggling growth. It was an easy and convenient story for the long-suffering bears who are emotionally invested in the idea that a giant bubble is about to pop and the market will suffer tremendous carnage.
Perhaps disaster does await the market, but for now the mood is shifting and optimism is rebuilding. Bonds have shrugged off interest rate concerns and the market is discounting supply chain worries. Expectations for earnings are fairly low, and the technical action of the last month or so is providing a good setup.
I'm not the only one who has a more positive view of the market. Investor's Business Daily, which largely focuses on big-cap, high price-to-earnings growth stocks, has shifted its market view back to "confirmed uptrend" after Thursday's action. IBD notes, "The Nasdaq's strong gain in higher volume resulted in a follow-through day, a confirmation of the rally that started on October 5."
While the technical conditions are now improved and the mood is better, it is a mistake to anticipate a straight-up move from here. It is important that there be some consolidation and pullbacks that allow short-term folks to take their profits and move aside. The thing that is important is that a new base of support is in place and that the pullbacks stay relatively shallow.
Strong action, like that which occurred on Thursday, helps to create fear of missing out. When market players are feeling FOMO, they are more inclined to be aggressive at buying dips. Dip buying works extremely well in an uptrend, and that is how people tend to deal with FOMO when it hits.
We have a strong open on the way with cryptocurrencies being particularly active on talk that the Securities and Exchange Commission is about ready to approve an ETF for Bitcoin futures.